PCAOB Sanctions Marcum LLP for Auditor Independence Violations

The PCAOB has settled disciplinary proceedings against New York-based Marcum LLP (FY18 net revenue of $549.7 million), Marcum Bernstein & Pinchuk and Alfonse Giugliano, the senior partner responsible for Marcum’s independence policies and procedures.

Marcum has a 50% ownership interest in Marcum Bernstein & Pinchuk, provider of SEC audit, accounting and consulting services to Chinese companies listed in the U.S. capital markets.

The violations involve the firms’ annual Microcap Conference and China Conference, which is designed to bring together investors and companies looking for investment. According to the PCAOB, “from 2012 through 2015, Marcum and two senior partners made public statements advocating the investment potential of the companies presenting at its annual Microcap Conference, 62 of which were the firm’s issuer audit clients.”

Also, in 2013 and 2014, Marcum Bernstein & Pinchuk advocated the investment potential of the companies participating in its China Conference, seven of which were the firm’s issuer audit clients. Giugliano approved Marcum LLP’s conference “without performing any substantial independence analysis,” PCAOB says.

This is the first time the board has sanctioned a CPA firm and its head of independence for publicly advocating its audit clients as investment opportunities. Another first is the PCAOB’s mandating of an independent consultant to evaluate auditor independence at the two firms.

The PCAOB orders say that success of the two conferences depended on companies perceiving them as good ways to connect with potential investors, and on potential investors perceiving them as a good opportunity to find high-quality investment opportunities. And yet, at the same time, the firms had issued audit reports on the financial statements of some of the presenters.

In the case of the MicroCap conference, the PCAOB says Giugliano approved the conference, and gave “limited advice” that Marcum should not be involved in company presentations or one-on-one meetings with investors. He also advised that Marcum should not make positive statements about individual presenting companies. PCAOB, however, says Giugliano failed to consider how an investor relations firm, brought in to market the conference, would tout the investment potential of the presenting companies as a group.

Marcum’s own public statements and marketing also included laudatory statements about the companies, as “some of the most promising emerging growth companies out there today,” in one example.

PCAOB alerted Marcum to possible independence issues with respect to the conference in 2015. The firm removed some positive language about the companies from promotional materials, added a disclaimer to its conference website and changed quality control policies. Marcum subsequently failed to evaluate the effectiveness of those measures, the PCAOB order says.

“As a result, Marcum failed to identify, evaluate or appropriately address a number of issues concerning the 2016 and 2017 conferences that, at the very least, raised questions about the firm’s independence.” PCAOB reported that Marcum sold one of its audit clients a “sponsoring” presenting company designation in 2016 and another client was sold a “premium” presenting company designation the next year without performing an independence review.

Additionally, Marcum provided press release templates to presenting companies, including the audit clients. “A number of Marcum’s issuer audit clients issued press releases that included Marcum’s suggested language, thereby using the conference’s reputation and association with their auditor to promote themselves to investors,” according to the PCAOB order.

Penalities are $450,000 for Marcum, $50,000 for Marcum Bernstein & Pinchuk and $25,000 for Giugliano. Marcum LLP and Marcum Bernstein & Pinchuk must additionally hire an independent consultant to review its policies, procedures, staffing and training related to auditor independence.